Excerpt5

One of the central ironies of today’s financial statecraft is that “global governance” isn’t always, or even mostly, about the “globe.” Instead it’s about groups, and the interaction of groups. This shouldn’t be entirely surprising. As we saw at the outset of this book, bargaining at the multilateral level involves players of great diverse strategic interests, as well as stages of development and philosophies. Crafting a deal at a global level with any real import is often difficult, especially when parties are expected to make sacrifices of some sort. For every additional member you put at the negotiation table, an exponentially greater number of issues potentially have to be haggled over, as each country will want to satisfy its own preferences. In such circumstances, getting to an agreement can be difficult. Thus smaller negotiation groups can be, and indeed often are, quite attractive.

Of all the arenas of international economic law, no other domain has seen the power of small numbers more than international trade. Trade deals of all sizes and natures increasingly populate interstate economic relations, such to the extent that they are steadily decreasing the importance of the multilateralism embodied by the WTO. For many economists, this is a truly disconcerting phenomenon. Free trade, at least as it has been traditionally conceived, works to the advantage of all countries by lowering barriers to the flow of goods, insofar as each is able to exploit its own competitive advantages. Along these lines, countries that grow the best-tasting, most delicious bananas should be free to sell those bananas to the world, instead of consumers in other countries getting stuck with second-rate bananas just because they live in a different country. Meanwhile, other countries can focus on what they do best, whether it be cattle ranching or producing planes. Free trade should be global and allow “each country to concentrate its productive efforts in ways that will give it the most return (and reciprocally, ensure the same maximum return to its trading partners).” In that way, increasingly sophisticated divisions of labor give rise to ever greater “welfare” gains to society.

Why then is minilateralism an important, if not defining, feature of today’s international trade agenda? For one, unlike some economics professors, practitioners of financial statecraft are not always (or even usually) concerned with the “absolute” gains of free trade. This is because free trade may be good from a “global” standpoint, but it is not necessarily good for everyone, especially governments whose countries are home to inefficient or noncompetitive industries that have particularly strong political power. When countries reduce barriers, their consumers may benefit, but these welfare gains are diffuse. A country might be able to import better bananas, but local farmers may go broke as business shifts to other countries. Moreover, the beneficiaries of tariff walls – the CEOs, investors, and even workers of protected industries – are usually much more concentrated than consumers at large. Plus, they are incentived to lobby against change, and if necessary punish lawmakers if they deregulate or liberalize trade at these beneficiaries’ expense. Lowering imports may additionally require adjusting to the new competition in ways that a country’s citizens may not like – such as becoming more efficient by closing factories and slashing salaries, or adhering to weaker environmental or child protection regulations that may be popular or acceptable in competitor economies. Consequently, countries are often picky about whom they trade with, and under what circumstances.

The fact that bargaining in small numbers can have disproportionately large ramifications for the global financial system does not answer the underlying question as to whether or not, from an economic standpoint, regionalism is better or worse than traditional multilateralism. Some economists, of course, look on the system with disfavor. Liberalization is not, as it were, strictly “on the merits.” Free trade isn’t just free; it’s also preferential, because not all countries are playing on a level field. Countries that hold competitive advantages in providing a particular service or in manufacturing a particular product won’t necessarily offer the lowest prices, creating inefficiencies, or as Jagdish Baghwati describes it, “termites,” in the international trading system. Plus preferences create special interests that block future attempts to liberalize trade relations with other countries – both at the minilateral and multilateral levels.

But minilateralism can certainly prove to be an important stepping stone to a multilateral accord. This is because countries’ interests in trade are not fixed – a point often overlooked by economists and political scientists alike. Since Adam Smith, free trade proponents have envisioned countries as possessing relatively static natural advantages of climate and location, but in today’s world, where technology is just as important as natural resources, that is no longer the case. Indeed, with proper planning and a little luck, a country can bounce up the economic value chain and compete with other, more developed countries. From this perspective, minilateral accords can be helpful tools in making the transition. Global agreements can be risky and difficult to evaluate, especially for a poor country concerned with the possibility that opening its doors to the world could wipe out its nascent local industries. Instead, a minilateral accord with familiar trading partners is more likely to be able to bridge immediate circumstances with long-term competitive priorities. And once a country becomes more competitive – similar to, say, a South Korea or a Mexico – its interest in taking on the world and increasing its market share grows.

And even if you’re a more traditional free trader seeking broad-based liberalization, minilateralism still impresses. In the real world, multilateralism is, despite its theoretical advantages, unlikely to achieve deep and consistent integration. Because it requires broad-based buy-in and consent, any member can, for whatever reason, prevent a rule from going global simply by objecting to it. Not surprisingly, when agreements are reached, they often include finely detailed (and innumerable) carve-outs and exceptions pasted to the back of trade deals in annexes, codes, and reservations. Thus even at the global level, trade deals can and often do introduce trade distortions of varying sizes and consequences as exceptions swallow rules.